Sunday, September 24, 2006

Harris County avoids trendy toll road privatization

Just a quick pass-along tonight from Otis White's Urban Notebook (no permalinks) at Governing.com on why governments are looking at selling off toll roads, with a reference to Steve Radack, Harris County commissioner. As I've said before, I think this is a relatively rare case where privatization is a bad idea, and Harris County made the right decision resisting it.

Those Scary, Scary VotersTell Me Again Why We’re Selling This Highway

There’s a problem with many of our toll roads: They don’t charge enough in tolls. Some have gone decades without an increase and, as a result, have tolls so low that they don’t even cover the cost of collecting them. So the answer is simple, right? Raise the tolls. Nah, too much trouble. Some politicians would rather just sell the whole darned thing.

We’re not making this up. One state, Indiana, has already leased out its long-distance toll road, which runs from Illinois to Ohio, for the next 75 years. The stated reason: Well, we couldn’t bring ourselves to raise the tolls, so we decided to get out of the business. If you’re thinking that there must be more to this bizarre idea, you’re right. Only thing is, the back story is even stranger.

The back story: Money for building roads is running out fast, the result of supply and demand problems. On the demand side, the cost of road building is skyrocketing. On the supply side, motor fuel taxes aren’t keeping up. (Projections are that the federal highway trust fund will run dry in three years’ time, something that’s never happened. State highway funds are nearly as tight.)

There are some obvious solutions: Raise the gas tax, which has lagged behind inflation; hike existing tolls and use the increase to subsidize construction elsewhere; or allow state toll road authorities to impose tolls on existing roads, also with the idea of replenishing state highway funds. But these solutions run into the political cowardice problem. What if, gulp, the voters don’t like paying a little more? That’s where the bizarre idea of selling the toll roads comes in.

Gov. Mitch Daniels of Indiana is the most ardent advocate of privatization. The payoff? A huge windfall. When Daniels leased the Indiana Toll Road to a consortium of foreign investors, he got $3.8 billion, which he says will be used mostly for new road construction. And what will the new owners do when they take over? They’ll hike the tolls, of course, then keep raising them on a regular basis.

Keep in mind: The state could have raised the tolls itself. It could even have tacked on something extra to help pay for road construction elsewhere. So why didn’t it? Because, Daniels explained in a recent op-ed in the New York Times, the toll road “was run by politicians, who are rarely businesslike and [are] deathly afraid to annoy anyone.” This is a strange self-indictment, considering Daniels is Indiana’s top politician.

Thankfully, not everyone is buying this bizarre logic. One skeptic is Steve Radack, a county commissioner in Harris County, Texas, where Houston is located. As he told the Wall Street Journal recently, he’s handing out copies of the children’s book “The Giving Tree” to people interested in selling off the roads. The book is about a boy and a generous apple tree, which gives the boy its fruit to eat and anything else he wants, including its branches and trunk. In the end, of course, there’s nothing left but the stump. Radack uses the book to make a point: “If you can sell [a highway] for tremendous profit, then why is someone buying it? Because they know they can make even more.” And with a little courage, so could governments.

Footnote: But at least Daniels is a hero in his own state for wringing so much money out of the toll road, right? Hardly. People along the route were furious that the governor handed over their road to work to a private company. (Bumper stickers read: “Keep the Toll Road, Lease Mitch.”) Daniels’ approval ratings, the Washington Post reported recently, plunged from about 50 percent before the lease idea to 37 percent after. Next door in Illinois, the Republican and Democratic candidates for governor have taken note of Daniels’ missteps and are promising they won’t sell that state’s roads, even though some estimate the Illinois Tollway alone could fetch $15 billion. “I have no interest in turning it over to private investors,” Gov. Rod Blagojevich told reporters.

6 Comments:

I assume from both of your posts, that you think privatizing toll roads in general is the relatively rare instance of privatizing being a bad idea, as opposed to just the Harris County roads. And, on that point, I agree.

If the sale was justified on the basis that this COMPLETES the road system quicker, it might be justified. However, as the population grows, more roads are needed. The need never ends.

Selling the roads is analagous to buying groceries with a credit card. You'll still be paying for last month's groceries while you look for money to buy this month's.

If politicians are too afraid to raise the revenue needed to build the infrastructure the citizens demand, then perhaps they should find another line of work.

Maybe someone should be telling Europe that the thousands of miles of new Toll Roads they are building to connect the European Union Countries shouldn't be privatized. That is the method they are chosing. France, Greece and Italy have expanding networks based upon this model of privatized roads. Germany has the model the US currently uses, but finding funding is becoming difficult.

Countries such as Greece, Italy, Poland, and Spain which don't have extensive expressway road networks are utlizing the privatization method to build roads they could never afford. In these situations, the road doesn't exist and the private company designs and builds the new transportation networks. The governments of each country and the EU have oversite to protect small towns and village and in many cases in Europe, historical sites.

The model Texas is implementing is based upon the European models. This is part of the reason companies in Europe are investing in wanting to build these roads in Texas.

Companies such as Cintra (from Spain) and Skanza (from Denmark) are currently under contract to build roads are willing to invest up to and more than $200 million (of their own money and not taxpayers') to build a road, and then operate it as a business. Three toll facilities in the Austin area are already under contract and well on there way to begin construction. State Highway 121 in the north Dallas area will have new tolled main lanes (feeders exist and are free) operated by Skanza.

I don't see this as much different then when Japanese investors in the 80s were buying large real estate investments in New York City and other metros. Many of the larger skycrapers are owned and operated by foreign owners.

We also currently let China manage and operate several components to some of the larger seaports in the US. So to me, a foreign owned and operated toll road is not unusual.

After all this, I'm still happy Harris County didn't sell their system. The reason I'm happy is because HCTRA is currently running surpluses. They can easily pay their bond debts and have large sums of money that is being returned to the county for non-toll road improvements. The toll roads aren't neglected either. The Beltway has many future plans for improvements, some already underway. Harris County selling off the toll roads would not have been financially smart.

Another thing to note in Fort Bend and Harris County, new roads built through foreign investment will most likely not occur since TxDOT will be treading on another entity's turf. TxDOT will have to make agreements with HCTRA (and they aren't the best of friends after some Grand Parkway disagreements). Agreements do existing for the Katy Freeway tolled center lanes, but TxDOT will not recieve much of that and is limited to only recouping construction cost. Look for HCTRA to make the same deal for the US 290 and potential I-45 North Toll roads.

I think there is a stronger argument for intercity private toll roads (like the TTC) than intracity. The "public road vs. private road competition" is much less of an issue between cities than within a city, where noncompete clauses could get messy (ex. would a private buyer of the Hardy insist that 45N and 59N not get expanded?).

I would like to point out as an anti-rail activist that while there are plenty of stories being printed of (toll) roads getting put up for sale, there are hardly any stories being written about rail lines being privatized in urban areas. Las Vegas had a private / public monorail system built, but I can hardly think any others.

It is usually a good thing to notice these things as it usually indicates revealed preferences as to what people really want verses what various political groups say people want. That in turn usually makes for more rational public policy.

I have posted on this subject before, but it is worth mentioning again that tolling and especially privatization drastically increases the administrative overhead of building and maintaing highways. You have the cost of physical toll collection facilities, the ongoing billing cost, payments to credit card companies, technology upgrades, and enforcement. And in the case of privatization you have to pay for the private firm's profit and also cover the higher cost of capital (vs public bonds). There are a lot of middlemen looking to make a lot of money on toll roads at the public's expense.

As for Southern European countries using privatization, keep in mind that these are countries with average incomes far lower than the United States. Maybe not poor, but not at the level of the US or Germany. Do we really need to adopt the the practices of low-income countries? (yes, a few high income countries like France also use this model)

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Social Systems Architect and entrepreneur with a genuine love of my hometown. I cover a wide range of topics in this blog - including transportation, transit, economic development, quality-of-life, city identity, and development and land-use regulations - and have published numerous Houston Chronicle op-eds on these topics. I'm a Founding Senior Fellow with the Center for Opportunity Urbanism and co-authored the original study with noted urbanist Joel Kotkin and others, creating a city philosophy around upward social mobility for all citizens as an alternative to the popular smart growth, new urbanism, and creative class movements. I am a native Houstonian, 6th-generation Texan, attended Rice University for my BSEE and MBA, and a former McKinsey consultant and adjunct faculty member with Leadership Houston. I am currently the founder of Coached Schooling, pioneering a transformational new approach for a more effective and engaging 21st-century K-12 education combining the best elements of eLearning, home and traditional schooling. CONTACT EMAIL: tgattis (at) pdq.net - send me an email if you would like to receive these posts via email, or see the Google Groups signup box below.